Is Santa Coming?
Every year investors look for the Santa rally. We certainly have not seen any evidence of the white beard in the last two months, but as the month ended there was the smell of Christmas pudding in the air. It has not lasted largely because the market no longer knows what to make of what voters or politicians will do.
In the introduction to the last Monthly Update we suggested that nothing new had really occurred, but the market had changed it’s focus. The feeling that earnings growth will not get any better (in the US) means that investors stop looking up and when they stop looking up they look down.
So they focused on trade wars and rising interest rates and markets went down.
The month ended with Trump and Xi breaking bread and bond yields below where they were at the end of September.
So should we be returning to the highs in the US at least?
December will have its own news, but even if it did not, investors rarely react in the same way as they have changed.
At the start of the financial year US investors had experienced several years of consistent gains. That tends to make investors see the world more optimistically. A 10% correction certainly wakes them up and even if the world looks the same as it did a few months ago, investors feel more tentative.
That is why you will sometimes hear people talk about a healthy correction. If something goes straight up investors are probably getting too excited and jumping on the train after it has left the station. You will see that we are very reluctant to buy at these times. A correction takes out the froth and returns assets to more attractive valuations. Unless something major changes we have just had a bit of a reset. However the experience of the declines makes the market more jittery as the previous confidence in buying the dip is not there and we get more volatile moves.
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